Competitive Advantage in a Warming World

Various reports around the world have been coming out on climate change and its effects on the planet. Businesses around the world are recognising the need to change. For example, in Australia the Business Council of Australia has asked for a regulated carbon trading scheme, something the Howard government is still thinking about.

An example from the Pew Center showed the Carbon Leaders of the future. In this scenario, how do we create competitive advantage, the ultimate goal of any business strategy leader in a carbon-constrained future.

Jonathan Lash and Fred Wellington offer a guide in the Harvard Business Review on the risks and opportunities of a warming world. Their message is simple: It’s not enough to do something; you have to do it better –and more quickly – than your competitors.

The authors suggest that companies generally think of environment risk in terms of “regulatory compliance, potential liability from industrial accidents, and pollutant release mitigation” however, since this is a global and long term issue it is different this time.

They quote Wal-Mart CEO Lee Scott who says that, a corporate focus on reducing greenhouse gases as quickly as possible is a good business strategy: “It will save money for our customers, make us a more efficient business, and help position us to compete effectively in a carbon-constrained world.”

A set of six climate change risks are identified and these can be converted into opportunities.

Regulatory risks: It is inevitable that there will be some kind of emissions trading scheme in the world in the coming years. Companies need to model how this will effect them and create a strategy to gain advantage over less prescient rivals.

Supply Chain risk: All the risks suggested can extend to the supply chain and they could pass on their increased costs to the companies. In a globalized world, the supply chain could be spread across multiple regulatory environments and companies need to be working with their suppliers in managing the risks.

Product and technology risk: This is basically a new opportunity in a carbon-constrained world. From new technologies (carbon sequestration) to products (hybrid cars) to financial services (brokers for carbon markets). Companies which understand this sector will be able to create new growth opportunities better than their competitors.

Litigation risk: Equating the risk to ones faced by tobacco, pharma and asbestos companies, the carbon heavy companies can face significant law suits in the future.

Reputational risk: Genuine Green companies have a stronger brand. Period.

Physical risk: Climate change will pose direct physical risks in terms of the change in physical environment.

The authors provide a four step plan to create a competitive advantage in this area.

  • Step 1: Quantify your carbon footprint. – Use the GHG Protocol or something similar. The idea: You can’t manage what you can’t measure.
  • Step 2: Assess your carbon-related risks and opportunities. – Use the above risks to assess your business.
  • Step 3: Adapt your business in response to the risks and opportunities – Use best practices and create new business models.
  • Step 4: Do it better than your competitors. – This can be achieved by “reducing exposure to climate-related risks and finding business opportunities within those risks.”
  • As Jeffrey Immelt commented, “Our customers have made it clear that providing solutions to environmental challenges like climate change is essential to society’s well-being, and a clear growth opportunity for GE. Companies with the technology and vision to provide products and services that address climate and other pressing issues will enjoy a competitive advantage.

    Lash and Wellington have provided a good framework to understand this new area. Translating this into a strategic and financial model for a company is a hard act. However, the framework is a good starting point.

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    One thought on “Competitive Advantage in a Warming World

    1. Pingback: World is Green : Business Strategy and Sustainability Climate Change Growth Index «

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